Court of Justice clarifies the legality of royalty payments in the event of revocation

Court of Justice clarifies the legality of royalty payments in the event of revocation

Court of Justice clarifies the legality of royalty payments in the event of revocation

On 7 July 2016, the Court of Justice ruled on a request for a preliminary ruling from the Paris Appeal Court. The question arose in the context of a dispute between two pharmaceutical companies, Genentech Inc. ("Genentech") and Hoechst GmbH ("Hoechst").

The Court ruled that, in specific circumstances, Article 101 TFEU permits the conclusion of a license agreement under which running royalties have to be paid even if the licensed patent is revoked or not infringed, as long as the licensee is freely able to terminate the agreement upon reasonable notice.

In 1992, Hoechst granted a worldwide non-exclusive license to Genentech for the use of a patented technology. As consideration, Genentech undertook to pay a one-off fee, an annual fixed fee and running royalties over the sale of certain 'finished products'. Although Genentech paid the one-off and annual fixed fees, it did not pay any running royalties. Litigation ensued, and in 2012 the sole arbitrator ruled that running royalty fees were due even if patents had been revoked or were not infringed by Genentech’s activities. According to the arbitrator, Genentech had entered into the license agreement with the commercial purpose to avert patent litigation and to benefit from a ‘temporary truce’ with Hoechst for the duration of the license agreement.

Genentech subsequently brought an action before the Paris Appeal Court seeking annulment of the arbitral ruling by claiming that the license agreement infringed Article 101 TFEU. In 2014, the national court referred a preliminary question on this matter to the Court of Justice.

The Court of Justice first recalled its judgment in Ottung, in which it ruled that the obligation to pay running royalties after the licensed patent has expired may be permissible if the licensee is able to freely terminate the agreement upon reasonable notice. In Genentech, the Court found that the same rule applies by analogy to a requirement to pay a royalty in the event of the revocation or non-infringement of the licensed patent. It is still open to debate if this ruling can also be applied to license agreements which have a different commercial purpose than to avert patent litigation.

The ruling of the Court in Ottung and Genentech can be contrasted to the US Supreme Court ruling in Kimble et al v. Marvel. In that judgment, the Supreme Court confirmed that an obligation to pay royalties beyond the term of a patent is illegal per se. Following the judgments in Ottung and Genentech, it is clear that, in specific circumstances, post-expiry running royalty payments may be permissible under article 101 TFEU.

This article was published in the Competition Law Newsletter of August 2016. Other articles in this newsletter:

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